Key Takeaways
- The technology and communication services sectors, along with large-blend stocks, were the biggest winners in the third quarter.
- AI giants Apple, Alphabet, and Nvidia were the leading individual contributors.
- Consumer defensives and Netflix were the primary drags on the market.
After a strong second quarter, the stock market carried its momentum into the third, with the artificial intelligence trade showing no signs of slowing. Mega-cap names including Apple AAPL, Alphabet GOOGL/GOOG, and Nvidia NVDA powered the market to a 8.1% gain.
Of the 8.1% return on the Morningstar US Market Index, 3.9 percentage points came from the technology sector—more than double the amount added by the next-biggest contributor, communication services, which added 1.3 percentage points. Both sectors outperformed the market in the quarter; the Morningstar US Technology Index gained 12.4%, while the Morningstar US Communication Services Index gained 12.8%. In the year to date, the Technology Index is up 20.6% and the Communication Services Index is up 25.6%. That’s close to double the 14.6% return on the US Market Index.
Best- and Worst-Performing Stocks 
The leading drag on the market in the quarter was the consumer defensive sector, which dropped 2.7% and detracted 0.1 percentage points from the overall return.
Looking at the nine Morningstar Style Box categories, large blend stocks had the largest contribution at 3.6 percentage points, while large growth had the second-largest contribution at 2.3 points. The Morningstar US Large Core Index gained 4.6% in the quarter, while the Morningstar US Large Growth Index gained 6.7%.
The three small-cap style box indexes had the smallest impact on the US Market Index because of their low weightings, yet they were the quarter’s top performers. Small growth returned 8.5%, small blend returned 8.1%, and small value returned 7.2%. Falling interest rates have primed small caps for strong returns, with small-cap tech—particularly semiconductor firms such as Astera Labs ALAB and Credo Technology CRDO—surging of late. Mid-cap growth stocks performed worst in the quarter, climbing just 2.5%.
AI Stocks Lead Market Performance in Q3
Drilling into the areas with the most outsized impact in the third quarter—tech, communication services, and large-blend stocks—a common thread appears. A few major players capitalized by AI hype continued to carry the market.
All of the top 10 contributors are major AI players. Led by Apple and Alphabet, which each added 1.3 percentage points to the market’s return, these ten contributors accounted for 5.5 of the 8.1 percentage points gained by the US market index in the third quarter.
Apple’s share price got a boost following its pledge to invest an additional $100 billion in the US, primarily in the manufacturing of semiconductors and glass for iPhones. “We expect this announcement to secure a long-term exemption from US import tariffs for Apple,” wrote Morningstar senior equity analyst William Kerwin. “Apple holds significant manufacturing exposure in China and India, and we believe it needed to placate the Trump administration with US investment to avoid costly tariffs.”
Alphabet saw its share price jump on news in the Google Search antitrust case that it won’t be required to divest Chrome or Android. “The Google Search case has been hanging over Alphabet’s head,” wrote Morningstar analyst Malik Ahmed Khan following the ruling. “With this ruling, investors can breathe a sigh of relief, knowing that US District Judge Amit Mehta did not propose structural remedies that could have been value-destructive. With shares jumping 7% following the decision, we now view Alphabet as fairly valued, with the stock up more than 50% from its April lows.”
Consumer Defensives and Netflix Struggle in Q3
Consumer defensives constituted the only sector with a negative overall impact on returns in the quarter, falling 2.7% and detracting 0.1 points. Among the leading drags from the sector were Costco COST and Philip Morris PM, which each detracted 0.05 points.
Real estate posted the second-lowest return in the third quarter at 3.2%, though the sector holds just a 2.3% weight in the market index. The sector’s biggest drag came from American Tower AMT, which cut 0.02 percentage points from the market’s return.
The leading detractor was not from consumer defensives or real estate, however. Netflix NFLX—part of the quarter’s top-performing sector, communication services—fell 10.5% and shaved 0.1 percentage points off the market return, the largest hit from any stock in the index.